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Inequality Aversion and the Optimal Composition of Government Expenditure

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  • John Creedy
  • Shuyun May Li
  • Solmaz Moslehi

Abstract

This paper examines the choice of government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping generations model. Government expenditure is tax-financed on a pay-asyou- go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found which produces explicit solutions for the optimal composition. The result is used to obtain an indication of ‘implicit’ inequality aversion for a range of countries.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1086.

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Length: 25 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mlb:wpaper:1086

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Keywords: Overlapping Generations; Composition of Government Expenditure; Utilitarian Social Welfare Function;

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  1. Ghiglino, Christian & Tvede, Mich, 1998. "Optimal policy in OG models," Working Papers 08-1998, Copenhagen Business School, Department of Economics.
  2. Lambert, Peter J. & Millimet, Daniel L. & Slottje, Daniel, 2003. "Inequality aversion and the natural rate of subjective inequality," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1061-1090, May.
  3. Creedy, John & Moslehi, Solmaz, 2009. "Modelling the composition of government expenditure in democracies," European Journal of Political Economy, Elsevier, vol. 25(1), pages 42-55, March.
  4. Robert J. Brent, 1984. "Use of Distributional Weights in Cost-Benefit Analysis: a Survey of Schools," Public Finance Review, , vol. 12(2), pages 213-230, April.
  5. Mera, Koichi, 1969. "Experimental Determination of Relative Marginal Utilities," The Quarterly Journal of Economics, MIT Press, vol. 83(3), pages 464-77, August.
  6. Christiansen, Vidar & Jansen, Eilev S., 1978. "Implicit social preferences in the Norwegian system of indirect taxation," Journal of Public Economics, Elsevier, vol. 10(2), pages 217-245, October.
  7. David Madden, 1995. "An analysis of indirect tax reform in Ireland in the 1980s," Fiscal Studies, Institute for Fiscal Studies, vol. 16(1), pages 18-37, May.
  8. Xisco Oliver Rullán & Amedeo Spadaro, 2004. "Are Spanish governments really averse to inequality? a normative analysis using the 1999 Spanish tax reform," Investigaciones Economicas, Fundación SEPI, vol. 28(3), pages 551-566, September.
  9. Schwarze, Johannes & Harpfer, Marco, 2007. "Are people inequality averse, and do they prefer redistribution by the state?: Evidence from German longitudinal data on life satisfaction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 233-249, April.
  10. Corneo, Giacomo & Gruner, Hans Peter, 2002. "Individual preferences for political redistribution," Journal of Public Economics, Elsevier, vol. 83(1), pages 83-107, January.
  11. Tridimas, George, 2001. " The Economics and Politics of the Structure of Public Expenditure," Public Choice, Springer, vol. 106(3-4), pages 299-316, March.
  12. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  13. Amiel, Yoram & Creedy, John & Hurn, Stan, 1999. " Measuring Attitudes towards Inequality," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(1), pages 83-96, March.
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